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New Disclosure Rules and Procedures Effective January 2009

Annette Nellen

New Disclosure Rules and Procedures Effective January 2009

Are you ready?

December 11, 2008

by Annette Nellen, CPA/Esq.

IRC §7216, Disclosure or Use of Information by Preparers of Returns, provides a criminal penalty for certain information disclosure. While this rule has been part of the tax law since 1971, the IRS recently modified the regulations to improve the ability of taxpayers to protect their tax return information (TRI). Prior to this revision, the §7216 regulations had remained mostly unchanged since 1974. As noted in the proposed regulations (REG-137243-02 (PDF); December 2005), existing regulations addressed a “paper-filing era” and thus, failed to address disclosure issues inherent in an electronic environment. The new regulations (TD 9375 (PDF); January 2008 and TD 9409 (PDF); July 2008) modernize the disclosure rules.

This article provides an overview to §7216 and related rules and the new guidance.

Privacy and Consumer Protection

No doubt, the ability to easily transfer electronic data makes us more concerned about protecting key personal information such as Social Security numbers (SSN) and contact information. Thus, the IRS determined that disclosure rules needed to be rewritten with electronic communication in mind.

In addition to privacy concerns, some people wanted to see the disclosure rules protect taxpayers from preparers marketing products to clients, such as refund anticipation loans (RALs) and IRAs. They encouraged the IRS to draft the final rules such that even taxpayer consent would not allow for disclosure of TRI (see, for example, PennPIRG testimony, April 2006). The IRS did not follow this recommendation in the final regulations, instead opting to recognize the right of taxpayers to control their TRI (TD 9375 (PDF)).

The IRS did issue an Advance Notice of Proposed Rulemaking (Ann. 2008-7 (PDF); January 2008) requesting comments on a possible rule preventing preparers from obtaining consent to disclose or use TRI for marketing RALs and similar products.

IRC Provisions

Two IRC provisions address disclosure or use of return information by a tax return preparer. Accompanying §7216 is §6713, Disclosure or use of information by preparers of returns, added by the Technical and Miscellaneous Revenue Act (TAMRA) of 1988 (PL 100-647; November 1988). The language used for both disclosure penalties is similar as noted below.

§6713

§7216

(a) General Rule

If any

Any

person who is engaged in the business of preparing or providing services in connection with the preparation of, returns of tax imposed by chapter 1, or any person who for compensation prepares any such return for any other person, and

who—

who knowingly or recklessly—

(1) discloses any information furnished to him for, or in connection with, the preparation of any such return, or
(2) uses any such information for any purpose other than to prepare, or assist in preparing, any such return,

shall pay a penalty of $250 for each such disclosure or use, but the total amount imposed under this subsection on such a person for any calendar year shall not exceed $10,000.

shall be guilty of a misdemeanor, and, upon conviction thereof, shall be fined not more than $1,000, or imprisoned not more than one year, or both together with the costs of prosecution.

(b) Exceptions

The exceptions specified at §7216(b) and Reg. §301.7216-2 apply for both penalties.

Preparer intent

Not relevant.

Relevant.

Type of returns

Chapter 1 (income taxes).

Overview to New Guidance

The regulations and related Revenue Procedure 2008-35 (replacing Rev. Proc. 2008-12 (PDF)), guide return preparers in knowing whether disclosure or use of TRI is allowed and when taxpayer consent is required. As described by the IRS (R-2008-2; January 2008):

“The final rules affirm a general rule in place for more than three decades that taxpayers, not the IRS, control their own tax return information held by preparers and, within appropriate limits and safeguards, taxpayers are able to direct preparers to disclose tax return information as taxpayers see fit.”

The regulations include many of the same rules from the original regulations. However, there are more details, examples and changes to address today’s ways of doing business. Selected highlights of the new guidance follow.

§301.7216-1:

Defines the terms used in §7216 and the regulations including “tax return preparer,” “tax return information,” “use” and “disclosure.”

The definition of tax return preparer under §7216 is broader than under §7701(a)(36) applicable to the §6694 preparer penalty. For example, an administrative assistant to a CPA is subject to §7216 if he is compensated for assisting with return preparation, but he is not a preparer under §7701(a)(36).

Explains the types of disclosures that do not require taxpayer consent, such as disclosure of TRI to an IRS employee.

§301.7216-3:

Explains the procedures for obtaining consent for disclosure or use of TRI.

All consents must be knowing and voluntary, written, include the taxpayer and preparer names, identify the specific intended purpose of the disclosure or use, the TRI to be disclosed or used, For any type of Form 1040, the specific recipient of the TRI must also be identified.

Consent format: For taxpayers filing any type of Form 1040, the procedures are in Rev. Proc. 2008-35. For taxpayers filing other income tax returns, the form and content guidance is at §301.7216-3(a)(iii) that generally allows for any format including an engagement letter provided the general requirements of §301-7216-3(a)(3)(i) are followed (see prior bullet).

Generally, a taxpayer cannot consent to the disclosure of their SSN to a preparer outside of the U.S. unless the SSN is only disclosed using “adequate data protection safeguards” and this information is included in the consent (§301.7216-3T).

Retroactive consents are prohibited.

A consent for soliciting business unrelated to tax return preparation is not allowed after the preparer provides the completed return to the taxpayer.

If the taxpayer does not consent, the preparer may not ask again.

If no time limit is specified, the consent is effective for one year from the date signed.

The taxpayer must be given a copy of the consent.

Rev. Proc. 2008-35:

Explains the format and content of both paper and electronic consents to disclose or use TRI of taxpayers filing any type of 1040 return.

Specifies the paper and font size and mandatory language on informing the taxpayer that he does not have to sign the consent, that he can specify a time period and what a taxpayer should do if he believes his TRI has been improperly disclosed or used.

For electronic consents, the requirements for an electronic signature are provided.

For further details and examples, the regulations and revenue procedure, as well as the IRS Web site on §7216, should be reviewed.

Related Guidance

In addition to the penalty provisions, preparers may be subject to disclosure and confidentiality rules of their licensing authority and professional organizations. For example, AICPA Professional Conduct Rule 301 addresses confidentiality of client information. The AICPA Statement on Standards for Tax Services also address some confidentiality considerations.

Looking Forward

The new disclosure rules in the §7216 regulations are effective for disclosures or uses of TRI after December 31, 2008. Thus, preparers who have not yet reviewed them should do so and be sure their office procedures are updated where necessary. Additional guidance is expected on disclosures and uses of TRI that may be prohibited (even with consent) such as with respect to solicitation of RALs.

While the new rules aim to safeguard TRI in the hands of return preparers, they are limited. For example, §6713 ad §7216 only apply to income tax returns. Also, while preparers have mandatory language to use in consents related to 1040 TRI, taxpayers will only get that from compliant preparers. The IRS needs to find ways to inform all taxpayers of their rights to the protection of their TRI when dealing with return preparers as broadly defined in the §7216 regulations.

Annette Nellen, CPA, Esq., is a tax professor and Director of the MST Program at San José State University. Nellen is an active member of the tax sections of the ABA and AICPA. She serves on the AICPA's Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog.